Welfare politics in Indian states: Too much, too soon, with too little?

Are welfare state and its agents, the political parties, making such excessive promises, particularly in pre-election years, with undesirable consequences?

The promise of too much, too soon, with too little is tempting for politicians for mobilising votes, particularly of the poor. This proclivity is also fuelled by an altered view about a decent standard of living triggered by a sea change in the location of the poor in recent decades. Most of the poor — nine out of 10 in 1990 — used to live in poor or low-income countries. Now, three-quarters live in middle-income countries. 

 

The indisputable moral imperative of helping the poor becomes compelling in middle-income countries, and gets reinforced by electoral compulsions in democracies. Recent elections in Indian states have witnessed political parties promising a plethora of schemes, such as enhanced cash transfers to women, free gas cylinders, free electricity to farmers, farm loan waiver, free food packets and smartphones, and scooters to women.

 

Are some of these too much, too soon, with too little? Are the welfare state and its agents, the political parties, making such excessive promises, particularly in pre-election years, with undesirable consequences?

 

The problems with delivering impractical promises are well-known to us from our experience with free medical treatment at government hospitals. Yes, it is free, but quite often not available. Hospitals are overcrowded, admission for inhouse treatment involves a long waiting time, and medicines and ambulances which are supposed to be available free have to be purchased from outside. Is the promise of free tertiary medical care to all ‘too much’ ‘too soon?’

 

Most people would agree that the poor should get free food ration and medical treatment, or that the poor farmer should get free or subsidised electricity for irrigation. Much of the problem of ‘too much’ would have disappeared if the poor could be accurately targeted. 

 

But most people are engaged in the informal sector, and their income is difficult to decipher.  Elected officials have nothing to gain and much to lose by denying a ‘low’ income certification to their constituents. With only about 100 million people paying it, income tax data is of not much help in identifying the poor.

 

Experience with the not-so-poor voluntarily giving up subsidies is not very encouraging — in 2021, of the 247.2 million active LPG domestic customers, just 10.3 million responded to Prime Minister Modi’s appeal to surrender their LPG subsidy. A reasonably well-designed mechanism for targeting the poor is yet to be identified and implemented.

 

In technical terms, exclusion error is excluding from the list those who are poor and should have been included, while inclusion error is including as poor and eligible those that are not. Moral judgement and fear of opprobrium, particularly political, make avoiding ‘exclusion error’ the dominant consideration over circumventing ‘inclusion errors.’ 

 

Too many inclusion errors create a resource problem.  Some would consider the Pradhan Mantri Garib Kalyan Anna Yojana, which provides free food grains to more than 810 million beneficiaries at an annual cost of over Rs 2 trillion for five years from January 1, 2024, as an example of too many inclusions. It almost mimics a universal basic income scheme whereby each individual receives a fixed transfer, regardless of income.  

They would argue that there is ‘too little’ fiscal resource to finance such a universal programme without either increasing taxes exorbitantly or scaling back capital expenditure needed to boost inclusive growth and eradicate poverty on a sustained basis.

 

There are serious unintended consequences of promising too much, too soon, with too little.  First, the scarcity of the promised cash transfer or supply of subsidised public good or service relative to the entitlements of eligible parties leads to corruption. It is akin to ‘black-marketing’ of products whose price is subjected to a ceiling much lower than the market-clearing price.  Bribes to politicians and officials, and ‘commission payments’ to touts and middlemen who ‘facilitate’ your getting your entitlement become commonplace. People become inure to corruption and social values deteriorate.

 

Second, there is the risk of moving from ‘too much’ to promising ‘even more’, because of a perverse incentive.  The black-market premium depends on the relative scarcity of the transfer, or of the subsidised public good or service. Vested interest groups gain from such a move.  

Third, problems in delivery of the promised ‘too much’ can lead to cutting back on productive investment, including in education, health and public infrastructure. Fourth, consistent shortfalls between delivery and promises corrode people’s trust in political parties. Trust is the coin of the realm. Politicians and parties, even when they are serious about their promises, find it hard to convince people about their sincerity. Sincere politics takes a back seat. 

 

The fiscal difficulties associated with delivering unrealistic pre-election promises have come to the fore recently in Himachal Pradesh, Telangana and Karnataka, where elections were held in the last two years. In all three, the winning party had promised women Rs 1,500-Rs 2,500 per month and free bus travel. In Himachal and Karnataka, the promise also included some free power. In addition, in Telangana, the promises included: To women gas cylinder at Rs 500; to farmers Rs 2 lakh loan waiver and an annual Rs 15,000 per acre; to tenant farmers an annual Rs 12,000; and a monthly pension of Rs 4,000 for senior citizens.

 

All the three states are facing difficulties in delivering the promises. For example, in Himachal, with a fiscal crisis, in September 2024, salaries could not be paid on time, and ministers had to forego their salaries for two months. In mid-November, the Himachal High Court ordered attachment of the Himachal Bhawan in Delhi for the recovery of Rs 150 crore debt owed to a power firm. The Himachal government is considering a rollback or rationalisation of the ‘freebies’.

 

Hopefully, in other states, political parties will learn their lessons from this experience.    

 

The writer is a member of the West Bengal Legislative Assembly and a former Chief Economic Advisor